UK recovery: the reasons why and why not

When the UK economy was recovering in 2010 a lot of people assumed the downturn was over, that the bad economic times were drawing to a close. This column often expressed puzzlement. The markets were buoyant, but the reasons unpinning their enthusiasm seemed as solid as an especially ethereal ghost. This time it is happening again, but are there better reasons for confidence?

Actually you can really put the confidence into categories. There is confidence based on reality; based on very exciting developments. And there is confidence based on the same old ills that got us into trouble in the first place.

But dig deeper and there are other reasons for optimism. Take the car industry. UK car exports have soared by 178 per cent since 1998. Over the same time period, car imports have risen by 102 per cent.

The growth in exports has been constant too. In Q1 1998 they were worth £2.2 billion; in 2005 £3.2 billion; they passed £4 billion in 2008 and in Q1 of this year they were worth £6.2 billion. In fact between 1998 and the first quarter of this year, there have only been three quarters in which exports of motor vehicles exceeded imports, but those three quarters all occurred in the last 15 months. And as is the case that US companies are, as it were, re-shoring or bringing their manufacturing back to their home country, much the same thing is happening in the UK, albeit on a smaller scale, and lagging somewhat behind.

Recent Purchasing Managers’ Indices (PMIs) and a survey from the British Chamber of Commerce both point to rising exports, while data from the ONS shows that exports to China have increased seven-fold since 2002. Growth in exports to the rest of the BRICS has not been so fast, but has nonetheless been impressive. In December 2012 the BRICS collectively represented the UK’s third largest export market, behind the US and Germany. Okay imports have risen too, but in recent years the pace of export growth to the BRICS has been greater than import growth.

For years the UK relied on exporting its wares to the Eurozone. It was generally agreed that the UK needs to re-balance from consumer to export led growth, but that is not an easy thing to do when your main trading partner is in economic depression. It has taken time to reduce our reliance on this region, but at last this appears to be happening.

Looking further forward, 3D printing may provide a new opportunity. Retailers may start making clothes on demand, and shop assistants could become experts in computer aided design. We may even see the return of craftsman on the high street, making products for niche markets or on demand, using 3D printing to make products as cheaply as was once only possible with assembly line production.

Although there are reasons to be cautious about a buoyant housing market, it does appear that construction is set to take off, quite significantly.

Recently, Capital Economics said: “While some economists fear that the economy’s underlying growth rate is now as low as 1 per cent, we think that it will revert to its pre-crisis average of about 2.5per cent. Demographic developments should remain favourable. The rate of technological progress should remain strong. And the reduction in the role of the public sector in the economy will create opportunities for more efficient firms.”

But, and this is the really promising bit, Capital Economics reckons growth will be around 4 per cent a year in the UK during the second half of this decade as the economy catches up with potential after years of operating below potential.

So far so good. But what are the catches?

Well there are several. For one thing, wages are still not growing as fast as prices. This means that workers are finding that month on month they are worse off than they were a year previously.

By Michael Baxter

An entrepreneur with well-honed business acumen, Michael Baxter writes on a wide range of economic and socio-economic issues. He launched the Investment and Business News Daily Newsletter in January 2003. Since then, Michael has written over 2million words on all things economics. The newsletter is read by thousands each day.